Gold, Silver, Metal Prices Commentary – October 6, 2010

Reverberations of the surprise easing by the Bank of Japan continued to buoy a host of assets during the overnight and Wednesday daytime trading hours. Asian equity markets staged strong rallies, as did those in Europe, following yesterday’s hefty US market gains. Commodities also continued to gain in value following Tuesday’s melt-up in gold, copper and tin prices.

Following the first drop in private sector payrolls (as reported by ADP’s survey released earlier today) since the beginning of the year engendered a further slide in the US dollar which sank to an eight-month low (against the euro) and stoked further apprehensions about what the Labour Department’s Friday report might reveal.

In addition, Fitch’s rating service sliced on "A-" from its grading of Ireland; however the move did not come as a surprise and the European common currency maintained previously achieved gains on the perception that the remainder of the PIIGS group is not showing signs of contagion from the Irish economic situation.

Gold prices climbed further, setting a fresh price pinnacle at the $1,3252.00 level earlier this morning. The rest of the complex benefited from lavish fund (and now retail-origin) investment, with silver trading at $23.05 and platinum climbing to $10 above the $1,700 mark (for a $19 per ounce gain). Palladium rose $10 to the $587.00 level while rhodium remained static at $2,230.00 the ounce.

Crude oil exhibited similar speculative-induced value-additions, rising to $83.54 per barrel, while copper, advanced to a 27-month high. The overall commodities sector was lifted to 24-month highs in the wake of the aforementioned frenzied speculation that asset purchases by a string of central banks is a virtual certainty.

Treasurys climbed while yields on five-year instruments fell to record lows. Speculation that the Japanese move is but the first salvo in a barrage of global easing yet to come remained the sole identifiable factor behind the sudden investor euphoria and grab by spec funds of practically every asset class within reach.

The near nil, or practically even sub-zero interest rate environment has been compelling market participants to seek returns in otherwise normally risk-laden niches. To wit, the search for a ‘yield’ in gold. To wit, the surge in the sales of junk bonds at the very same juncture. To wit, the huge demand for structured notes, M&A deals flourishing faster than green goo in a Petri dish, and the stubborn price resilience in real estate markets such as London or Vancouver, Perth or Singapore.

Not the normal order of the investment universe, this. Look no further than the ownership structure of the largest gold ETF. About 10% of its total pile of bullion is held but by three such return-thrill-seekers: Messrs. Paulson, Mindich, and Soros. No, this is no quest for capital preservation; this is a quest for yields/returns/profits — pure as 9999 gold and simple. Blomberg’s Matthew Lynn sums up the conditions by warning that: "All of these markets have gone bonkers." Headlines blare: "Want to catch gold fever?"

"Among savers, low rates are creating demand for assets that don’t really belong in the portfolios of most ordinary investors, and are bound to collapse in price once money becomes more expensive again." Notes Mr. Lynn. "Central bankers," also says Mr. Lynn "may believe they are propping up demand." However, he adds: "they also need to recognize that they are creating new bubbles." — the kind that got everyone into trouble, to begin with. Well, at least we can count on the consistency of human nature…

While we will be among the first ones to perennially remind such ‘ordinary’ investors that gold does in fact have a clear-cut rationale for being present even in an ‘ordinary’ portfolio (and at a level that would make a ‘conventional’ money manager…wince: 10%) there is also something to be said about trying to overload in an asset (any asset) for the sake of profits-before-safety. You know how that formula worked out for dot-com and/or Florida condo ‘investors.’ "Diversify or die" (with paper profits never realized) may sound trite, but, does it ever ring true these days.

Next up, the markets will parse the Bank of England’s and also the ECB’s imminent decisions on whether or not to also offer any additional stimulus or go "on hold." Australia’s central bank, as well as those of Canada and New Zealand have decided that while they shall offer no further QE-flavored economic sweeteners, they will also put on hold the process of raising interest rates upon which they had embarked in previous months. The mere cessation of such exit strategies has emboldened speculators to pile on risk despite the fact that the strategies apparently being adopted by various monetary authorities have no guarantees of turning out to be effective.

The G-7 ministers will come together on Friday in Washington as a sideshow to the IMF’s meeting that will take place in the US capital. Presumably, currency "issues" will be one of the featured items on the various ministers’ agendas. Translation: the markets are factoring in a currency war and a race to the bottom in rates. What is to be done about that?

With the IMF having warned that the ‘green shoots’ in several advanced economies are showing signs of being in danger of succumbing to the early frost of continuing high unemployment and sluggish growth statistics, the "TBD" list of the G-7 is suddenly an awfully short one. Ease some more, or grin and bear it, in the hopes that the first round of accommodations might eventually do the trick? As shown in yesterday’s article, the global economic growth map is actually not looking as horrible as it would seem to appear, judging by either some more recent headlines or by the statements coming from certain central bankers.

However, the growing shortfall between the IMF’s previous global growth target of about 3.75% and on-the-ground reality in various nations is apparently strong enough on its own to have spooked a host of central bankers whose about-to-be-enacted or already-under-way exit processes were the former priority. This summer’s European debt crisis was the likeliest suspect among the chief causes of such a departure from the intended itinerary by central banks. However, there could be other impact agents at work, most of which remain unidentified, for the moment.

Despite not having fallen into contraction mode, the stare/blink contest of the day is clearly between the US and Japan. Both countries are loathe to let their economies slip into a renewed dip, both countries are deflation-averse, both countries have political leaders under scrutiny as they attempt to keep things afloat. As for the efficacy of the easing race that is apparently in progress, well, Columbia U Nobel-laureate professor Joseph Stiglitz offered a ‘mini-lecture’ for the two central banks in question.

Said Mr. Stiglitz: "It [the conclusion that to ease is to survive] is doing nothing for [at least] the US economy and causing chaos for the rest of the world."

Marketwatch’s Mark Hulbert ‘dared’ to publish a cautionary gold tale this very morning. Jim Cramer’s red-hot clarion call (prediction?) for $2,000 gold (hmmm…what sound effect might one use for that forecast?) had not yet reached room temperature when Mr. Hulbert warned — at one minute past midnight last night-that — on a historical basis-October can bring some ‘corrective’ phases that countervail typically surging September patterns in gold prices.

Seasonality or not, one really does have to ask themselves if — Fed second-guessing aside — the greenback can continue to add to the roughly 12% in losses it has sustained since June, or the 7% in losses it has shown since the start of September. One has to ask themselves if gold can continue to show a curve — such as the one seen below [courtesy of our friends at Standard Bank SA] — whereby it is gaining at a pace far ahead of the increases in liquidity in the markets.

That answer might well be positive — given the type of players that have invaded these markets — but it comes along with a growing number of conditional words.

The BoJ rate move (and implied speculation that the Fed takes the next bungee jump to the bottom of the rate canyon) was identified as the sole mover of the gold market yesterday, by one observer. Commodity analysts have also identified the presence of a typically late-in-showing up/early-to-exit species of investor on the gold scene: the small, retail investor.

Based on such an appearance on the retail prairie scene and on recent fund ‘allocation’ (AKA ‘pile-’em high’) patterns, at least one Indian commodity strategist feels that a roughly $150 pullback could be in the cards in gold over the next 45 to 60 days. Technicals might appear to dominate, but sentiment still rules here, in the opinion of one bullion bank trader we spoke with. He pointed to yesterday’s better-than-forecast ISM numbers and noted the complete absence of attention being paid to it for the rest of the trading day by the gold specs. At least one school of thought assesses the path to $1,375+ as relatively ‘clear’ now that the $1,320 and $1,350 markers have been overcome.

Focus on those specifics-oriented musings if price and/or performance are the object. Focus on the broader picture and consider the catalysts for potential change (dollar behavior near pivotal support points, the Fed’s vocabulary, or the sheer number of ebullient talking heads on financial channels) if there is anything you consider to be at risk in the ‘gone bonkers’ markets. Finally, simply be (content) if you are not a trader whose adrenalin is pumping hard these days. They sleep with one eye open, the smart-phone on, and a finger taped to the nearest pointing device.

[…] said about trying to overload in an asset (any asset) for the sake of profits-before-safety," noted Jon Nadler, senior analyst at Kitco Metals, Inc. "You know how that formula worked out for dot-com and/or […]